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Financial Instruments | 3 Months Ended
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Oct. 27, 2024
General Discussion of Derivative Instruments and Hedging Activities [Abstract] |
Financial Instruments | Financial Instruments The principal market risks to which we are exposed are changes in foreign currency exchange rates, interest rates and commodity prices. In addition, we are exposed to price changes related to certain deferred compensation obligations. In order to manage these exposures, we follow established risk management policies and procedures, including the use of derivative contracts such as swaps, rate locks, options, forwards and commodity futures. We enter into these derivative contracts for periods consistent with the related underlying exposures, and the contracts do not constitute positions independent of those exposures. We do not enter into derivative contracts for speculative purposes and do not use leveraged instruments. Our derivative programs include instruments that qualify for hedge accounting treatment and instruments that are not designated as accounting hedges. Concentration of Credit Risk We are exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. To mitigate counterparty credit risk, we enter into contracts only with carefully selected, leading, credit-worthy financial institutions, and distribute contracts among several financial institutions to reduce the concentration of credit risk. We did not have credit risk-related contingent features in our derivative instruments as of October 27, 2024, or July 28, 2024. We are also exposed to credit risk from our customers. During 2024, our largest customer accounted for approximately 22% of our consolidated net sales. Our five largest customers accounted for approximately 47% of our consolidated net sales in 2024. We closely monitor credit risk associated with counterpartie s and customers. Foreign Currency Exchange Risk We are exposed to foreign currency exchange risk, primarily the Canadian dollar and Euro, related to intercompany transactions and third-party transactions. We utilize foreign exchange forward purchase and sale contracts and option contracts to hedge these exposures. The contracts are either designated as cash-flow hedging instruments or are undesignated. We hedge portions of our forecasted foreign currency transaction exposure with foreign exchange forward contracts for periods typically up to 18 months. The notional amount of foreign exchange forward contracts accounted for as cash-flow hedges was $99 million as of October 27, 2024, and $108 million as of July 28, 2024. Changes in the fair value on the portion of the derivative included in the assessment of hedge effectiveness of cash-flow hedges are recorded in other comprehensive income (loss), until earnings are affected by the variability of cash flows. For derivatives that are designated and qualify as hedging instruments, the initial fair value of hedge components excluded from the assessment of effectiveness is recognized in earnings under a systematic and rational method over the life of the hedging instrument and is presented in the same statement of earnings line item as the earnings effect of the hedged item. Any difference between the change in the fair value of the hedge components excluded from the assessment of effectiveness and the amounts recognized in earnings is recorded as a component of other comprehensive income (loss). The notional amount of foreign exchange forward and option contracts that are not designated as accounting hedges was $458 million as of October 27, 2024, and $189 million as of July 28, 2024. Interest Rate Risk We manage our exposure to changes in interest rates by optimizin g the use of variable-rate and fixed-rate debt. From time to time, we may use interest rate swaps in order to maintain our variable-to-total debt ratio within targeted guidelines. We manage our exposure to interest volatility on future debt issuances by entering into forward starting interest rate swaps or treasury lock contracts to hedge the rate on the interest payments related to the anticipated debt issuance. The forward starting interest rate swaps or treasury lock contracts are either designated as cash-flow hedging instruments or are undesignated. Changes in the fair value on the portion of the derivative included in the assessment of hedge effectiveness of cash-flow hedges are recorded in other comprehensive income (loss), and reclassified into Interest expense over the life of the debt issued. The change in fair value on undesignated instruments is recorded in Interest expense. In conjunction with the issuance of senior unsecured notes on October 2, 2024, due on March 23, 2035, we settled forward starting interest rate swaps with a notional value of $700 million at a gain of less than $1 million. The gain on these instruments was recorded in other comprehensive income (loss) and will be recognized in Interest expense over the life of the debt. There were no forward starting interest rate swaps or treasury lock contracts outstanding as of October 27, 2024 and July 28, 2024. Commodity Price Risk We principally use a combination of purchase orders and various short- and long-term supply arrangements in connection with the purchase of raw materials, including certain commodities and agricultural products. We also enter into commodity futures, options and swap contracts to reduce the volatility of price fluctuations of wheat, diesel fuel, soybean oil, natural gas, cocoa, aluminum, corn and soybean meal. Commodity futures, options and swap contracts are either designated as cash-flow hedging instruments or are undesignated. We hedge a portion of commodity requirements for periods typically up to 18 months. There were no commodity contracts designated as cash-flow hedges as of October 27, 2024, or July 28, 2024. The notional amount of commodity contracts not designated as accounting hedges was $145 million as of October 27, 2024, and $200 million as of July 28, 2024. The change in fair value on undesignated instruments is recorded in Cost of products sold. We have a supply contract under which prices for certain raw materials are established based on anticipated volume requirements over a twelve-month period. Certain prices under the contract are based in part on certain component parts of the raw materials that are in excess of our needs or not required for our operations, thereby creating an embedded derivative requiring bifurcation. We net settle amounts due under the contract with our counterparty. The notional amount was $29 million as of October 27, 2024, and $48 million as of July 28, 2024. The change in fair value on the embedded derivative is recorded in Cost of products sold. Deferred Compensation Obligation Price Risk We enter into swap contracts which hedge a portion of exposures relating to the total return of certain deferred compensation obligations. These contracts are not designated as hedges for accounting purposes. Unrealized gains (losses) and settlements are included in Administrative expenses in the Consolidated Statements of Earnings. We enter into these contracts for periods typically not exceeding 12 months. The notional amounts of the contracts were $80 million as of October 27, 2024, and $71 million as of July 28, 2024. The following table summarizes the fair value of derivative instruments on a gross basis as recorded in the Consolidated Balance Sheets as of October 27, 2024, and July 28, 2024:
(Millions) | Balance Sheet Classification |  | October 27, 2024 |  | July 28, 2024
Asset Derivatives |  |  |  |  |
Derivatives designated as hedges: |  |  |  |  |
Foreign exchange contracts | Other current assets |  | $ | 2 |  |  | $ | 2 |
Total derivatives designated as hedges |  |  | $ | 2 |  |  | $ | 2 |
Derivatives not designated as hedges: |  |  |  |  |
Commodity contracts | Other current assets |  | $ | 3 |  |  | $ | 6 |
Deferred compensation contracts | Other current assets |  | 1 |  |  | 3 |
Foreign exchange contracts | Other current assets |  | 1 |  |  | — |
Total derivatives not designated as hedges |  |  | $ | 5 |  |  | $ | 9 |
Total asset derivatives |  |  | $ | 7 |  |  | $ | 11 |
(Millions) | Balance Sheet Classification |  | October 27, 2024 |  | July 28, 2024
Liability Derivatives |  |  |  |  |
Derivatives not designated as hedges: |  |  |  |  |
Commodity contracts | Accrued liabilities |  | $ | 10 |  |  | $ | 16 |
Foreign exchange contracts | Accrued liabilities |  | 1 |  |  | — |
Total derivatives not designated as hedges |  |  | $ | 11 |  |  | $ | 16 |
Total liability derivatives |  |  | $ | 11 |  |  | $ | 16 |
We do not offset the fair values of derivative assets and liabilities executed with the same counterparty that are generally subject to enforceable netting agreements. However, if we were to offset and record the asset and liability balances of derivatives on a net basis, the amounts presented in the Consolidated Balance Sheets as of October 27, 2024, and July 28, 2024, would be adjusted as detailed in the following table:
|  | October 27, 2024 |  | July 28, 2024
(Millions) |  | Gross Amounts Presented in the Consolidated Balance Sheet |  | Gross Amounts Not Offset in the Consolidated Balance Sheet Subject to Netting Agreements |  | Net Amount |  | Gross Amounts Presented in the Consolidated Balance Sheet |  | Gross Amounts Not Offset in the Consolidated Balance Sheet Subject to Netting Agreements |  | Net Amount
Total asset derivatives |  | $ | 7 |  |  | $ | (1) |  |  | $ | 6 |  |  | $ | 11 |  |  | $ | (1) |  |  | $ | 10 |
Total liability derivatives |  | $ | 11 |  |  | $ | (1) |  |  | $ | 10 |  |  | $ | 16 |  |  | $ | (1) |  |  | $ | 15 |
We are required to maintain cash margin accounts in connection with funding the settlement of open positions for exchange-traded commodity derivative instruments. Cash margin asset balances of $2 million at October 27, 2024 and July 28, 2024 were included in Other current assets in the Consolidated Balance Sheets. The following table shows the effect of our derivative instruments designated as cash-flow hedges in other comprehensive income (loss) (OCI) and the Consolidated Statements of Earnings:
|  |  | Total Cash-Flow Hedge OCI Activity |
(Millions) |  |  | October 27, 2024 |  | October 29, 2023 |
Three Months Ended |  |  |  |  |  |
OCI derivative gain (loss) at beginning of quarter |  |  | $ | (11) |  |  | $ | (5) |  |
Effective portion of changes in fair value recognized in OCI: |  |  |  |  |  |
Foreign exchange contracts |  |  | — |  |  | 5 |  |
Forward starting interest rate swaps |  |  | — |  |  | 3 |  |
Amount of loss (gain) reclassified from OCI to earnings: | Location in Earnings |  |  |  |  |
Forward starting interest rate swaps | Interest expense |  | 1 |  |  | — |  |
OCI derivative gain (loss) at end of quarter |  |  | $ | (10) |  |  | $ | 3 |  |
Based on current valuations, the amount expected to be reclassified from OCI into earnings within the next 12 months is a loss of $1 million. The following table shows the total amounts of line items presented in the Consolidated Statements of Earnings, in which the effects of derivative instruments designated as cash-flow hedges are recorded and the total effect of hedge activity on these line items:
|  |  |  |  |  |  |  | Three Months Ended
|  |  |  |  |  |  |  | October 27, 2024 |  |  |  |  |  |  |  | October 29, 2023
(Millions) |  |  |  |  |  |  |  | Interest expense |  |  |  |  |  |  |  | Interest expense
Consolidated Statements of Earnings: |  |  |  |  |  |  |  | $ | 87 |  |  |  |  |  |  |  |  | $ | 49 |
Loss (gain) on cash-flow hedges: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Amount of loss (gain) reclassified from OCI to earnings |  |  |  |  |  |  |  | $ | 1 |  |  |  |  |  |  |  |  | $ | — |
The amount excluded from effectiveness testing recognized in each line item of earnings using an amortization approach was not material in all periods presented. The following table shows the effects of our derivative instruments not designated as hedges in the Consolidated Statements of Earnings:
|  | Location of Loss (Gain) Recognized in Earnings |  | Three Months Ended |  |
(Millions) |  |  | October 27, 2024 |  | October 29, 2023 |  |  |  |
Foreign exchange contracts |  | Cost of products sold |  | $ | — |  |  | $ | (1) |  |  |  |  |
Commodity contracts |  | Cost of products sold |  | (4) |  |  | 12 |  |  |  |  |
Deferred compensation contracts |  | Administrative expenses |  | (3) |  |  | 4 |  |  |  |  |
Total |  |  |  | $ | (7) |  |  | $ | 15 |  |  |  |  |

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 40 -Name Accounting Standards Codification -Section 50 -Paragraph 5 -Subparagraph (f) -Publisher FASB -URI https://asc.fasb.org/1943274/2147480237/815-40-50-5 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 5C -Subparagraph (b) -Publisher FASB -URI https://asc.fasb.org/1943274/2147480434/815-10-50-5C Reference 3: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 815 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org/815/tableOfContent + Details
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